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Markets Shrug Off Banking Turmoil
- Stock markets declined sharply mid-month following bank bailouts, but quickly recovered
- The global stock market (MSCI World Index) rose 2.8% in March and is up 7.4% this year
- The bond market (Bloomberg Global Aggregate Index) rose 2.5% and is up 2.9% this year
March 2023 was a month to remember. It started strongly, then the largest bank failures since 2008 created panic. Demand for ultra-safe short-term government bonds spiked, leading to the greatest three-day decline in bond yields since the 1987 stock market crash. Interest rate expectations are now fluctuating wildly, as central banks wrestle with the need to prop up the financial system while combating inflation in the real economy. The Bank of England and US Federal Reserve raised interest rates by 0.25%. Meanwhile, the inflation outlook remains very uncertain, with no clear signs of a return to the 2% official target. The Fed reversed six months of ‘quantitative tightening’ in two weeks, as $400bn of liquidity was injected into US banks. Major forces are now at play and analysts’ forecasts are almost equally split between ‘recession’, ‘no recession’…or simply muddling through.
The FTSE 100 has a relatively high exposure to banks and financial firms and declined by 6.9% at one point, before recovering most of its lost ground to end the month -3.0%. It remains within a long-term sideways range, after briefly hitting an all-time high of 8,000 earlier this year. There were similar monthly declines for the mid-cap FTSE 250 index (-4.5%) and AIM (-5.9%). UK stocks were among the worst performers globally in March. The UK market beat most others in 2022, but 2023 is beginning to remind us that the UK’s status as a ‘deep value’, cyclical market can cause periods of both over- and under-performance, relative to global peers.
US stocks outperformed as falling bond yields supported technology stocks. The S&P 500 finished 4.1% higher for the month despite a 10% decline in the banking sector, while the Nasdaq gained a whopping 7.5%. Consumers appear to be retaining the feel-good factor for now, as the leading sectors year-to-date include casinos & gaming stocks (+21.5%), hotels & cruise lines (+19.5%) and internet retailers (+17%).
Data from Europe highlighted the difficulties in determining a clear outlook for inflation. At the end of March, Germany reported that inflation declined by less than expected. Less than 24 hours later, the Eurozone as a whole reported that inflation declined by more than expected. Energy costs have come down significantly, but ‘core’ inflation is continuing to rise in most regions and oil prices spiked 7% in the first trading day of April.
European stock markets duly had a mixed month, with Germany (+2.1%) and France (+1.3%) leading for the first time this year, while Italy (-0.6%) and Spain (-0.9%) gave back some of the strong gains they made in January & February.
Emerging markets appear to have stabilised, after large gains in January and a hefty decline in February. The MSCI Emerging Markets Index ended March almost flat and is now +3.8% year-to-date. There has been a very high degree of dispersion between countries, however. Mexican stocks would have returned 17.1% in GBP terms during Q1, while South Korea (-21.5%), India (-8.9%) and Brazil (-7.9%) fared far worse. Currency effects loom large in emerging market investing and can have a significant impact on realised returns. The Mexican peso has gained 9% versus the pound since the start of the year – benefitting UK investors, but not such welcome news for those who prefer to holiday on its Caribbean coast.
Bond market volatility continues and hit levels equivalent to the peak of the 2008 financial crisis on 15 March, as the bank liquidity crisis reached its nadir. The bond market has arguably been more volatile than the stock market in recent months, with stocks’ volatility remaining relatively subdued versus the prior bear markets of 2020 and 2007-09. UK 10-year gilt yields now sit at the bottom of the 3.0%-4.5% range which has been in place since September. The same is true in the US. Note that bond yields move inversely to their prices. Will government bond yields break decisively lower as a recession finally materialises, or move higher as inflation remains elevated? Like central banks, they face a Catch-22 situation.
The author Ernest Hemingway once remarked that he went bankrupt “gradually, then suddenly”. The same could be said for Swiss banking giant, Credit Suisse. The 167-year-old institution saw its share price decline unremittingly from 2007 to 2022. It then lost 75% of its remaining market value in three days, before regulators forced it to be acquired by its rival, UBS, in a knock-down deal to secure its survival.
This followed bank runs and government bailouts in the US for Signature Bank and Silicon Valley Bank, caused by a toxic combination of unhedged mark-to-mark losses on their supposedly ‘safe’ US government bond collateral and the highest level of deposit withdrawals since 2001, as savers moved their money around to get the best interest rates on offer from other institutions. There is now concern that banks will become extremely risk-averse and stop making loans to households and businesses, leading to an economic contraction. Net US bank lending duly had its greatest weekly decline (-$69bn) since the aftermath of the Lehman Brothers collapse in November 2008, during the week to 22 March.
Points of Interest
UK house prices fell for the seventh month in a row. Average selling prices declined 0.8% in February, creating a total drawdown of 4.6% since the August peak. However, there may be signs that the market is finding an equilibrium, as net mortgage approvals rose from 39,600 in January to 43,500 in February – the first increase since August. The average interest rate on new mortgages now stands at 4.24%. The banking crisis emboldened those who believe in gold and bitcoin as safe-havens from fiat currency devaluation, with monthly returns of 7.2% and 23.2% respectively.
March is often a month which signals major turning points, such as the dawn of new bull markets in 2003, 2009 & 2020. There is a feeling that March 2023 might also represent the beginning of a significant move. There are certainly echoes of those previous years, with bank stress, investor fear and significant injections of central bank liquidity, For some time, analysts have focused on a new leg to the downside. However, there is a saying in finance that “pessimists sound smart, optimists make money”, and for the brave it can be profitable to remember that the sun also rises, out of the gloom.